|May 3, 2013|
Previously published on April 25, 2013
“Simply put, natural gas is presumptively not a mineral for purposes of private deeds.” In a single sentence, the Pennsylvania Supreme Court resolved any doubts regarding the continued vitality of the longstanding Dunham Rule. Under the Dunham Rule, a rebuttable presumption arises that an exception or reservation of “minerals” in connection with a conveyance of land does not include natural gas or oil. The Dunham Rule can be overcome by “clear and convincing evidence” that the intent of the parties at the time of the conveyance was to include natural gas or oil.
The Dunham Rule was recently brought into question in the case of Butler v. Powers Estate. In this case, the trial court was presented with the seemingly simple question of whether a reservation of “one-half [of] the minerals and Petroleum Oils” in an 1881 deed included in the reservation any natural gas underlying the subject lands. In accordance with the Dunham Rule, the trial court dismissed the case in favor of the Butlers, finding that as a matter of law, the term “minerals” as set forth in the reservation did not include natural gas. On appeal, the Superior Court overturned the trial court’s dismissal pursuant to the Dunham Rule and remanded with instructions to hold an evidentiary hearing on whether: (1) shale gas is conventional natural gas, (2) Marcellus shale is a ‘mineral,’ and (3) the entity that owns the shale owns the gas. Subsequently, the Butlers appealed to the Supreme Court on grounds that the Superior Court erred in remanding the case for an evidentiary hearing and in failing to follow the well-established Dunham Rule.
After hearing oral argument on October 16, 2012, the Pa. Supreme Court issued its highly-anticipated opinion on April 24, 2013, that reversed the Superior Court and reaffirmed the continued vitality of the Dunham Rule. Broadly, the critical inquiry in Butler was similar to the question decided more than 130 years prior in Dunham v. Kirkpatrick, 101 Pa. 36 (Pa. 1882): does the term “mineral” include natural gas or oil when used in a deed or other conveyance instrument? Though the legal arguments have certainly evolved, the presumptive answer remains a definitive “no.” Today, is as it was back at the time of the Dunham decision and its predecessor, Gibson v. Tyson, 5 Watts 34 (Pa. 1836), the term “mineral” does not include oil and natural gas absent clear and convincing evidence otherwise.
The opinion begins with a brief summary of the procedural posture and background facts before quickly turning to an extensive analysis of the origins and evolution of the Dunham Rule and its progeny. In doing so, the Court characterized the Dunham Rule and corresponding notion that “natural gas and oil are not, for purposes of private deed transfers, considered minerals” as being “entrenched” within Pennsylvania law. In line with many of the decisions cited in the opinion, the Court openly recognized the Dunham Rule as a pillar of Pennsylvania property law and acknowledged that such a well-established and relied upon rule of property should not be overturned absent compelling public policy concerns or other “imperative demands of justice.” Clearly, the Court understood the practical, far-reaching consequences of disturbing the Dunham Rule, specifically within the oil and gas industry.
Another central theme evidenced throughout the opinion is the concept that an ordinary, “common-man comprehension” approach to interpreting deed language has historically and properly been employed by courts, rather than engaging in a commercial, technical or scientific interpretation of such language. Thus, the Superior Court’s remand order for the trial court to hold an evidentiary hearing, complete with scientific evidence and expert testimony on whether Marcellus shale may be considered a mineral and whether shale gas is “conventional gas” constituted reversible error. As established by Dunham and its progeny, the relevant inquiry is the ordinary, common understanding of the word “minerals” as used in the reservation. Consistent with Dunham, the Supreme Court held that for private deed purposes, the term “minerals” does not include Marcellus shale natural gas.
Perhaps most importantly, the Court rejected the argument that the “owner of the shale owns the gas” which was grounded in its decision in United States Steel Corporation v. Hoge, 468 A.2d 1380 (Pa. 1982) (holding that the owner of the coal owns the coalbed methane gas) (“Hoge II”). The Supreme Court easily distinguished Hoge II from the Dunham line of cases and flatly rejected the notion that the Hoge II decision overruled or otherwise impacted the Dunham Rule.
However, the Butler decision leaves open the possibility for future argument on whether a reservation of petroleum oil also includes natural gas, which arguably is an “appurtenance, issue, or profit” of petroleum oil. The Court held that this argument was waived on procedural grounds and could not be addressed for the first time on appeal.
Additionally, the Hoge II decision which held that the owner of the coal owns the coalbed methane gas may be subject to future challenges as a result of the Supreme Court’s ruling in Butler. The foundation of the Court’s holding in Hoge II was based upon the premise that “coalbed gas was not commercially viable at the time of the deed reservation,” and therefore the parties could not have intended the reservation of “oil and gas” to include the coalbed methane gas. However, today, this premise does not hold true as coalbed methane gas is commonly understood to be a commercially viable and valuable commodity. Perhaps the most important lesson to take from Butler and Hoge II is to identify clearly, in plain and direct language, the subsurface rights being retained in any deed reservation.
In conclusion, the Supreme Court issued a well-reasoned, clear decision affirming the continued vitality of the Dunham Rule. This decision provides much needed clarity for title examiners and oil and gas producers engaged in the business of preparing and reviewing certified opinions of title and evaluating business risks associated with oil and gas production activities.